Lennar Corporation Q1 2026 Earnings Call

Good morning everybody and thanks for joining us today. We're in Miami and I'm here with Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; Katherine Martin, our Chief Legal Officer; Bruce Grove, CEO of Lennar Financial Services; Eric Feder, President of Lenar; and we have today Jim Parker and David Grove, our Area Presidents who are new to this program and who are now overseeing operations across the company. As you know, Jon Jaffe officially retired at the start of this year. While Jon's absence is deeply felt, the depth of experience and leadership on our team ensures we're just not going to miss a step. Jon, if you're listening, all is good. We hope you're enjoying your time at the beach. We're working hard and I promise you that Jim and David are comfortable with everything in their day-to-day new positions except for the trauma embedded in today's conference call. But it really is the only thing that you didn't prepare them for. Today I'm going to give a brief macro and strategic overview. After my remarks, you will hear briefly from Jim Parker and David Grove who will give a brief operational overview. Then Diane is going to give a detailed financial overview along with some limited guidance for the second quarter of 2026. And then we'll have our question and answer period. As usual, I'd like to ask that you limit yourself to one question and one follow-up so that we can accommodate as many as possible. We're pleased to review our first quarter 2026 results against the backdrop of what remains a stubbornly challenging housing market. Recently the challenges seem to have intensified given the volatility and uncertainty surrounding current events in the Middle East and the recent pullback of institutional purchasers as participants in the market. Nevertheless, even with additional hurdles, we believe that we are closer to an inflection point for Lennar than at any time in the past three years. In the first quarter, we remained focused on our clear and consistent strategy. We drove consistent volume and matched production and sales pace. We used margin as a circuit breaker and we continue to refine and improve our asset-light manufacturing platform. We have not pulled back and waited for the market to improve. We have maintained volume and focused on building improved business programs to bring costs down so that we can remain profitable and still provide needed housing supply. While our first quarter margins and our bottom line continued to reflect the affordability-driven realities of the current housing market, we also saw continuous improvement in all facets of our underlying cost structure that has set us on a course to stabilize and improve margins as we continue to produce volume and meet the market at affordability. Even with the current market challenges, we are feeling optimistic about our position in strategic markets and the progress made in reshaping our business for current conditions. We are adapting to market conditions as they are and not waiting for the market to bounce back. The macro economy continues to present a complex and at times unsettling backdrop for the housing market. Home prices remain high and have generally continued a pace of increase nationally that is generally higher than the pace of wage increases. Mortgage interest rates, which showed some early signs of easing towards the end of last year, have remained stubbornly over 6%, hovering around 6.2 to 6.4% through most of our first quarter. Affordability remains the central challenge facing our buyers, and consumer confidence while not collapsing continues to be tested by a range of uncertainties both domestic and global. The war in the Middle East is a wild card. It might end quickly and the world is a better and safer place, or it might trigger higher gas prices, higher inflation, and higher interest rates. On the employment front, consumers who had previously felt secure in their jobs are now questioning that security as technology-driven disruption, particularly the rapid advance of artificial intelligence, raises important questions about the future of our workforce. This uncertainty layers onto already strained household budgets and has made consumers more hesitant to commit to large purchases, particularly homes. Traffic has remained reasonably consistent across our communities, but the urgency to transact remains measured. At the same time, a combination of tariffs and immigration issues are keeping upward pressure on material and labor costs. We have been working hard to push against and manage these pressures through our trade partner relationships and through the efficiencies we have built into our manufacturing model. Nevertheless, the cost structure in the industry is pushing higher and is difficult to manage. The institutional purchasers have been sidelined by political pressures and popular sentiment. They have generally purchased somewhere between five and 7% of new homes in order to rent them. Ultimately, this movement will reduce demand in the market and signal to the industry to build less supply. On a more positive note, the federal government's engagement with the housing crisis continues to deepen. Federal officials have been actively engaged with builders and industry associations to understand the affordability challenge and explore practical solutions. The level of attention being paid at the federal level to the housing shortage is unprecedented. We believe that meaningful policy support is more likely now than at any time in recent history. Any program that effectively broadens access to affordable or attainable home ownership would be a significant tailwind for the industry and for Lennar specifically. In summary, the housing market remains caught in the tensions between underlying demand and constrained affordability. Supply is still critically short and years of underproduction have created a structural deficit that will take years to close. But we believe the conditions are building for an eventual recovery. Our strategy is and has remained very clear. We are focused on three core tenets: one, operationally driving consistent volume to maximize efficiency; two, financially refining our asset-light balance sheet to generate strong and growing returns and cash flow; and three, technologically engaging and incorporating new technologies to advance our operational progress and enhance our customer experience. In 2026, we are bringing new levels of expectation and accountability to each of these areas and expect to drive definable results quarter by quarter. We are on a focused and determined march to drive costs down this year. As I've said before, we are not nostalgically waiting for the market to reset to the way things were. Instead, we're adjusting ourselves to the way things are and we've made considerable progress. First, we see real progress in costs and efficiencies in our operating divisions. You will and will continue to hear more about progress in our production and supply chain areas that are enabling us to become a low-cost provider. Second, we are starting to see real traction in our technology initiatives that are creating efficiencies in the way that we operate. We now have our operators working collaboratively with engineers to develop product upgrades at speed and we have built transmission lines through the company for execution across our platform to drive uniformity. Additionally, we have brought into the company an important team of engineers and tech specialists enabling us to accelerate. Third, we are in the early stages of right-sizing our overhead. The technology migration has inflated our overhead. We have carried additional associates, consultants, and various other costs as we've started the process of modernizing our 71-year-old company with new technologies. The JDE ERP transition from World to E1 is now complete, which enables our resources to be focused on driving our business forward. Many of the resources that were needed to get started are no longer needed, and these costs will be transitioned throughout 2026 as those resources are returned to industry. As Jon Jaffe retired at the beginning of the year, a number of our longer-term Lennar associates have chosen to retire more recently in the context of current market conditions. Any of our tenured associates who have made Lennar what it is today always have the absolute privilege to retire on their terms. Each of them has led, trained, and nurtured future leaders who are themselves now tenured, ready to lead, and eager for the opportunity. Jon felt it was a good time to retire and frankly Jim and David were ready and anxious for their term. This is exactly how it's supposed to work and it's working well here at Lennar. Now, let's turn to our first quarter 2026 operating results. We started 17,425 homes and sold 18,515 homes, staying closely in balance and keeping our inventory properly sized. Our average sales price came in at $374,000, essentially flat to plan and down 8% from the prior year, a reflection of continued use of incentives to enable affordability and drive volume. Sales incentives on deliveries were 14.1%, roughly flat with Q4 of last year at 14.5%, and we are cautiously optimistic that incentive levels are beginning to stabilize. The new order incentive rate actually showed some early encouraging signs, notably below the 14.1% delivery incentive rate. As a result, our gross margin in the first quarter was 15.2%, reflecting improving discipline across construction, land, and overhead. Our SG&A came in at 9.8%, slightly above expectations. Net margin was 5.3%, producing net income of $229 million and EPS of $0.93. Our inventory turn improved to 2.5 times, up from 1.7 times a year ago, and our return on inventory was 17.4%. Our community count at 1,678 at quarter end was up 6% from a year ago. On the asset-light side, we continue to make strong progress. Less than 5% of our land is on balance sheet and our total homebuilding inventory has been reduced from just under $20 billion two years ago to $10.5 billion today. Our land banking relationships with Millrose, Angelo Gordon, Domain, Hearthstone, Apollo, and others continue to function extremely well, providing just-in-time homesite delivery. We have an 86% landbank delivery rate this quarter, up from 52% in Q1 of last year. We ended the quarter with $2.1 billion in cash and a homebuilding debt-to-capital ratio at 15.7%. In conclusion, while it has been another challenging quarter in a challenging housing market, it is another constructive quarter for Lennar. Our numbers are not yet where we'd like them to be, but the trajectory is just right. Costs are coming down, volume is holding, our asset-light platform is functioning extremely well, and our technology initiatives are beginning to yield real and measurable results. We always keep in mind that normalized incentive levels run 4 to 6% compared to the 14% we are carrying today. That gap is our opportunity and we are building toward it deliberately and with confidence. Our balance sheet is strong. Our land banking relationships are deep and productive and our technology initiatives are positioning Lennar to be a materially different and better company in the years ahead. We are building not just for this market but for the long term.

Before you go forward, Diane, great job, guys. But, David, how many years have you been with the company? ... 27. So, just want to make sure that everybody understands. Jimmy, you got 38 years in the industry and eight years here at Lennar from the CalAtlantic program. And David, 27 years right here at Lennar. ... Okay. Carry on.

So, the question is interesting, Alan, because it happens to be an interesting time to do an earnings call. There's enough brand new volatility since the end of our quarter to call into question any number of things. I think we've tried to give as much guidance as we saw through the quarter and not do too much to update that thinking under the banner that one week in a row doesn't make a trend, either to the positive or to the negative. The benefit we have right now is that immediately after this call, both Jim and David, as Jim carefully described, will be out in the field working with the divisions to see what the actual impact is and think about what we do to either offset or lean into the things we're seeing in the field. Without doing too much to update, I don't think we have an update. We haven't seen significant movement either in traffic or in the ability to sell. I just don't think that there's enough information to know whether this will be a short-term program or even as a long-term program, whether domestically it will be a net positive or net negative. But as we see things right now, we're not seeing significant movement in the market. It really has been pretty steady. Jim, you first.

So look, I would just summarize and say that first of all, we generally don't give updated guidance or information, but given the anomalous moment that we're in, it's worth putting it on the table that right now things are steady as we see them. Both Jim and David and myself for that matter are day-to-day in touch with our operators to get that feedback in real time. We're not seeing something that would adjust the way that we have thought about the information that we've given, including our guidance. For those of you who know me well, I don't complete writing the material that I deliver in our earnings call until generally late at night or early in the morning the night before. So we keep it pretty up to date and this was pretty well thought through.

So let me broaden the discussion to overhead, which is broader than just SG&A. The answer is that as numbers are reduced, it takes time for those numbers to flow through and come through our earnings reports. Theoretically, yes, we are seeing opportunities and expectations that our overhead is going to be meaningfully lower as we come to the end of the year. Whether it actually flows through one quarter or another, we're going to wait and see. Some of these things get a little bit sticky. Some of the costs associated with our technology initiatives are clearly front-end loaded. The transition from World to E1 was extraordinarily expensive. That's tapering off. It might take some time for that to flow through, but that's happening more quickly. There are other elements of what we have been working on and even the things where we misstepped and went down bad paths initially where money was spent and we don't have to spend that money anymore. Additionally, as I talked about senior management, we have so many extraordinary people within our company that are deciding to use this opportunity to retire and let the next generation shine. Though we haven't put out a public announcement, I'm sitting next to one of our favorites in Bruce. Bruce is going to be retiring. We've known this for months and Bruce is actually going to transition and become part of the Lennar Foundation working hand-in-hand with Marshall. But it's really across the company. Overhead reduction is a positive, but enabling the next generation of leaders to step up and put themselves on display, just as you've seen here this morning, is really the greater good. When I say fresh legs, if you look at the energy that Jim and David are bringing to the equation, if you listen to Laura Escobar in financial services, if you listen to others around the company, the opportunity to take a fresh look at a lot of things is a really unique opportunity that we're leaning into right now.

Well, Steve, interesting question. I'm thinking about it as you're asking it. The reality is that the answer is unique to each market and each market is a little bit different. When you look at a rollup of our company, it would be hard to cobble together a unified strategy. There are a number of considerations that are going into that calculation, and they're all very market specific. We don't have a specific mandate to grow market share, but we do recognize that with advantaged market share we are able to work with trade partners and land holders to do a better job of negotiating. I'm going to turn over to David first. Why don't you talk a little bit about land opportunities, and then Jim, maybe you'll think about some other components.

And I just have to say that the volatility embedded in putting your foot on the accelerator and then taking it off and putting it on the brake and going back and forth, it only creates inefficiencies in the development process, in the construction process, and all the processes. If we can build dependability for trade partners and even for land partners, we're going to get the best pricing and we're using that to our advantage. In each market we are doing our own very separate, very focused market study to think about the combination of pricing and pacing in our own unique way, focused not on answering competitive information but contextualizing it in terms of how can we rationalize affordability with cost structure to end up with the best configuration for the future. I just want to say one last thing. We didn't start with this with a notion that we're going to wait for the market to recover. Instead we said, market by market, we have focused on how do we construct the best version of Lennar to build efficiencies for a market that's likely to remain stubborn for a long time. It's now three and a half years and we haven't had that throwback to the past. We're constructing an operating platform that is reconfigured to be able to build affordability for the future. If you think back to the COVID time and the inflationary period in 2022-23, the cost structures grew alongside the pricing structures. We're left with the pricing and the cost structure is very sticky both on land and on vertical and horizontal construction. Rebuilding the company to be better positioned to build affordability has been hard work. It's being done division by division within its own structure and that rolls up to the number that you see corporately.

Look, this is an art, not a science. I can't predetermine today what we're going to do throughout the year. As I said, Steve, and as Jim carefully laid out, Jim and David are getting out into the field for operations reviews, division by division, bottom-up approach, working with the people. And that happens at Lennar all the way through the year. So what we say today might change over the next couple of weeks. We know there's a lot going on in the world that is affecting gas prices, inflation levels, interest rates, and that might be short-term or longer term. We're going to be connected with what's happening on the ground and it might be unique to different markets how it actually plays out. What we are solving for is how do we use as much volume consistency as we can to build efficiency in everything that we're doing. But we don't want to at the same time not pay attention to what the market is allowing us to do. We don't want to break the market. And so it's a balancing act. And that's why I say it's an art. It's not a science. Jim, you want to weigh in?

And our pricing mechanism, our pricing tool is really primarily focused on getting a tactile sense of where the customer is and where affordability lies. And this is our primary driver in our day-to-day hands-on pricing all the way through the company.

Well, not only is that a good question, that's a timely question. Eric and I spent some time in New York working through some of the capital markets approaches that we think about and dream about in terms of charting the path for the future of the company. I'm not going to be able to give you an answer as to where I think it can go, but I think that there's a field of opportunity. I think the financial transformation that we've gone through, separating land from homebuilding on the balance sheet, is really interesting. It's getting more interesting by the day. If you look at the risk-adjusted pricing for capital when you separate risk profiles, there's a field of opportunity to rationalize the costs that are associated with the different dimensions of land that we currently have. We are targeting specific land banking programs and relationships and trying to find the right bucket for the right land to minimize the option costs associated. Additionally, we think that over time by taking a capital markets thought process to the way that we have configured this, we're going to be able to think even better about how we bring land into availability for the company, how we manage the just-in-time delivery system, and all of this is going to have incremental benefit to that inventory turn number. So I don't think you've heard the last of inventory turn. I think we're continuing to reach higher. The one other thing that I want to detail is the importance of our core product to this discussion. The more we migrate to fewer products that we build over and over again, the more efficiency we're going to inject. I still look at our cycle times and how they've come down year-over-year from 137 days to 122 and quarter-over-quarter from about 126 or 127 days down to 122. I look at the focus in the field and the opportunity to make it better by using core products. How would you talk about that?

Yeah. And look, I've been there with you. You've been the instigator. And it's not just a competition to see who can do things faster. It's a combination of being able to bring the consistency that we give to our trade partners and even to land partners, enabling us to get better and better at the coordinated dance of building homes. And some of our divisions are just really paving new ground to improve that cycle time in a very constructive way.

New stars for the company. Okay.

So yeah, look, the discussion of core plans again, we can talk about it corporately but the reality is it's division by division by division. But the more important thing is how technology plays into all of this because we are migrating to a place where our due diligence program relative to land is going to be tied to an element of core plan engagement that is going to nudge the company using technology towards greater and greater use of core plan. Now you can imagine if we're talking about land engagement and due diligence process, it's going to take some time for this to actually come through the system. But this is an area where modern technologies across a diffuse platform, 50 divisions coast to coast, and getting that entire enterprise to push towards core plans, it is going to be technology that really drives us forward and we're building those connectors right now. But is there anything that you guys would say about where core plans are percentage-wise and how we're migrating through your ops reviews and division engagements?

Great. Okay.

So first of all, let me say we clearly have question marks around the two things that I detailed. The things that have happened in the short term that have kind of changed the landscape. Of course, turmoil in the Middle East has everybody's attention and we have a question mark what's that going to mean, how's it going to ripple through. And number two, the sidelining of the institutional investor is another component of that. There are a lot of people thinking about it. And if the institutional investors are really sidelined, is that going to instigate more primary buyers to the market as some believe, or is it going to reduce volume? We're going to have to wait and see. And I tried to leave room for those changes that impact the question of what our deliveries will be as we come through the year. But what drives us to continue to aim for that number is a base belief, a base optimism that I've been getting from both David and Jim about the configuration of our business. On the one hand you have these geopolitical issues or domestic issues that are counterbalancing. But I will tell you that leading up to the past couple of weeks there has been a sense of optimism about the programs that we have in place. Jim, why don't you talk about that a little bit?

I think there's a general sense of optimism at the company right now that we're going to do as good as the market allows. And I think that's a good place to stop. I want to thank everyone for joining us. I couldn't be more excited about the program we have in place and having David and Jim make it through their first traumatic conference call. And we look forward to continued progress.